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• US Dollar strength• Reviewing key NASDAQ

stocks• Google, Apple &

Microsoft reviewed

This week…

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General Advice & Risk WarningPlease note that any advice given by Invast staff is deemed to be GENERAL advice, as the information or advice given does not take into account your particular objectives, financial situation or needs.

Therefore at all times you should consider the appropriateness of the advice before you act further.

CFDs and Forex are leveraged products and carry a high level of risk and are not suitable for everyone. You can lose more than your initial deposit so you should ensure CFD and Forex trading meets your investment objectives. We recommend you seek independent advice. Strategies and charts used in this presentation are for example only. You are reminded that past performance is not indicative of future performance.

Invast Financial Services is regulated by ASIC. It's important for you to read and consider the relevant Product Disclosure Statement and Financial Services Guide which contains details of our fees and charges before you decide whether or not to acquire any financial products. These documents are available at www.invast.com.au

Invast Financial Services Pty Ltd ABN: 48 162 400 035. Australian Financial Services Licence No.438 283

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This week we look at the following topics:• US Dollar strength• Reviewing key NASDAQ stocks• Google, Apple & Microsoft reviewed

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Dear Readers,

Throughout the monthly of November we will be publishing our views and insights on US stock markets, following key results and how this impacts the Dow, S&P500, NASDAQ and Russel 200 index. With quantitative easing now complete and all eyes on the US market recovery, we thought it important to explore key themes coming out of US companies and how this impacts the largest stock indices in the world.

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As usual the commentary from the next four weeks will be followed by our monthly webinar. Invast clients will also have access to a webinar presented by Invast Insights editor Peter Esho this week on Tuesday 25 November at 6:30PM.

Our focus will be on the key names that drive each index. We will spend the first few weeks look at individual company results and then the later part of the month determining where the indices are going. Our approach is bottom up, we look at individual stocks to determine where the broader market is heading. We don’t just look at financial numbers in isolation, but focus on important comments also, as they highlight corporate confidence and signal intentions among traders.

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Our weekly summary will be as follows:

• Week commencing 3 November 2014 – US reporting season highlights – focus on key Dow stocks

• Week commencing 17 November 2014 – US reporting season highlights – focus on the Russell 2000 and key names within the index• Week commencing 24 November 2014 – Summary for price and valuation on the key indices, where they are heading into 2015

• Week commencing 10 November 2014 – US reporting season highlights – focus on key NASDAQ and technology names

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This week we focus on the NASDAQ – one of the most contentious globally traded indices due to the exposure it provides to some of the most exciting technology names in the world. As we wrote last week, results from US companies are important for any type of trader, even if you are purely trading forex markets the outcome of corporate America and movements on Wall Street are all important factors in determining where the US Fed sets rate policy.

We see a strong US dollar over the next few years and the market will go through turbulent times when adjusting to this. Keeping an eye on company news is vital. US stocks are among the largest in the world and even through Invast at the moment does not quote direct international stocks across its platforms, it does quote key indices on its MT4 platform. Our intention this month is to form a firm, fundamental and well considered view on these US indices. Our focus therefore from a trading perspective will be on the key indices through a bottom up approach.

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Image: NAS100 monthly chart via Invast MT4 platform

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The NASDAQ instrument quoted on Invast MT4 platform is based on the NASDAQ 100 index, not the NASDAQ composite. Traders should be aware of this. The NASDAQ composite tracks all companies listed on the NASDAQ exchange compared to the NASDAQ 100 which is purely, as the name suggests, the top 100 exposures in terms of market capitlisation. The reason we chose to cover US indices this month and the NASDAQ 100 in particular this week speaks for itself in the above chart via Invast MT4.

Generally, the NASDAQ 100 has a very high concentration to the top 10 names. For example we estimate holdings in the index to be as follows. Apple Inc. AAPL: 13.91% Microsoft Corp MSFT: 8.32% Google Inc. GOOG: 4.07% Gilead Sciences Inc. GILD: 3.64% Intel Corp INTC: 3.62% Facebook Inc. Class A FB: 3.61% Google Inc. Class A GOOGL: 3.46% Amazon.com Inc. AMZN: 3.04% Qualcomm Inc. QCOM: 2.83% Cisco Systems Inc. CSCO: 2.70%. Our calculations are as of 5 November, the exact numbers might chance by the time you read this report BUT the overwhelming exposure to the top 10 names is unlikely to change too much in the short term.

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We estimate these top 10 names account for around 49.2% of the NASDAQ index. The exposure across industries is fascinating. Around 58% of the NASDAQ 100 is exposed to the technology sector, 15% to healthcare, 13% to consumer cyclical names and just under 6% to other communication services. Basic materials represent just 0.4% of the NASDAQ 100 index. Perhaps this explains why there has been a huge difference in index returns between something like the ASX200 in Australia and the NASDAQ 100. The former is heavily exposed to mining and financials, the later heavily exposed to technology.

The NASDAQ 100 will therefore always trade on sentiment around investment in technology and the global trends driving consumption. We wrote about Apple and Microsoft last week and walking through the Dow Jones Industrial Average and discussing the importance of recent corporate results. If you missed that report, click here to read it.

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In general, we think the following themes will be key drivers for the NASDAQ 100 in the coming months:

1) What happens to Apple is very statistically significant. Apple is the single largest exposure at just under 14%. It is the largest company in the world in terms of market capitlisation. Apple is currently trading on a forward price to earnings ratio of around 14x which is not unreasonable. This earnings multiple is probably slightly below the long term market average since the end of the Second World War. What is important to note though is Apple’s very favourable capital position.

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What do we mean by this? A company with a huge amount of debt on a 14x price to earnings ratio is not the same as a company with a huge pile of cash on a 14x price to earnings ratio. Earnings ratios are a good guide to measure valuations, but they fall short of being comprehensive. Many traders who dismiss Apple’s valuation as being too expensive fail to also mention the huge amount of cash which Apple has at its disposal. Let us put this into perspective.

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Image: Snapshot of Apple’s total assets, source from their balance sheet.

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Apple basically has around US$14bn of cash on call (in the bank) and a portfolio of market investments worth a whopping US$141bn. It can sell these assets and turn them into cash. If we combine these two amounts, we can see that Apple has around US$155bn of liquid investments at its disposal. This compares with around US$29bn of long term debt. The net amount is a healthy US$136bn of NET liquid assets ignoring all other balance sheet items like inventories and debtors.

Apple’s market capitlisation (the value of the business) is US$637bn which means net liquid investments represent around 20% of this amount. The remaining 80% of the business is a valuation on its ability to continue developing, producing, marketing new products globally. Once the market gets a feel that this is at risk, the valuation could very much come under pressure and Apple would be called to put its liquid investments at use to ensure investors don’t get nervous.

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The table above shows that the regions that matter most to Apple are the Americas and Europe in terms of overall revenue generation. It puts into perspective the growth of Apple into Asia as opposed to maintaining its core in the markets that matter most. Don’t buy into the argument that Apple’s Asian growth is enough to offset any problems at home or in Europe as the Eurozone hits growth issues. The numbers show that Asian growth is not enough and in fact comparable revenue growth is going backwards.

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Product development is also crucial, the data above shows just how important the phone market is to Apple’s overall earnings. Tablet sales are falling and so product innovation is the key to growth once saturation in the phone market is reached.

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Did you know these facts about Apple? Probably not. You knew that Apple was important to the NASDAQ 100 but probably not aware of the key sensitivities to its business. What happens with Apple is essential to where the NASDAQ 100 goes. If you are trading the NASDAQ 100 index, you know how a solid framework for what to look out for.

2) While Apple is very important, it isn’t reflective of the whole market, just a significant proportion. There are other issues to consider for the NASDAQ 100. We spoke about Microsoft last week. It and other stocks will be impacted by a view on global rates. Investors will generally form a view on the NASDAQ 100 based on the overall strength of the US economy and the access to cheap money. Once global interest rates start moving higher, investors will be less willing to pay price to earnings ratios that are too high for technology names. The NASDAQ 100 is currently trading on a price to earnings ratio of 23.8x compared to the S&P500 at 18.8x.

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The NASDAQ 100 has a dividend yield of around 1.3%, which is fine when 1 year interest rates in the United States are at 0.11%. But as US interest rates rise, the yield on the NASDAQ will also need to rise. If we assume a corporate spread of today (1.3%-0.11%=1.19%) is to be maintained, at a 0.25% 1 year bond yield rate the NASDAQ will need to rise to 1.44% which implies earnings growth of 10.8% for all other things to be held equal.

If you don’t understand the above we will simplify it here. If the US starts to increase interest rates next year and the 1 year bond yield rises to a more adequate 0.25%, the NASDAQ 100 listed companies would need to deliver earnings growth of 10.8% in order to justify the current valuation. There will be huge pressure on NASDAQ 100 companies to meet these earnings expectations once the US Federal Reserve starts to adjust their short term interest rate policy. The table below shows US treasury yields as of 6 November 2014 via treasury.gov.

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Next week we will touch on the Russell 200 index which will have even greater sensitivities to movements in short term US treasury rates. Our focus is to help index traders build a fundamental picture around the sensitivities of key US markets coming off record high levels. The table below illustrates the current price to earnings ratio and dividend yields of the three major US indices outside of the Dow Jones. It also shows the huge amount of earnings growth being priced into the Russell 200 – an important consideration for its future technical levels.

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Table: US index valuation levels sourced via Wall Street Journal estimates.

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US stock market outlook: Join the webinar to discuss these points

Invast Insights editor and contributing author Peter Esho will summarise his November outlook for US markets, focusing on key indices like the Dow Jones, S&P500, NASDAQ and Russell 2000. Esho will go through recent company results to determine how the US economy is shaping up after the completion of quantitative easing.

Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your Money Your Call’. In his webinar he will outline:

How have recent company results fare in the US marketWhat signals are companies suggesting about the economyWhat valuations are implied by the key indices at the momentOutlook for where Wall St will go in 2015

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Peter’s webinar will cover both the fundamental and technical outlook on key US indices quoted on Invast’s MT4 platform, plus the key drivers to look out for when trading. This webinar is expected to fill fast. Q&A will be open straight after the presentation. Register now by visiting http://www.invast.com.au/resources/webinars.aspx.

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Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

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DisclaimerPlease note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us.

General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).

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Risk Warning: It's important for you to read and consider the relevant Product Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd documents before you decide whether or not to acquire any financial products listed in this email. Our Financial Services Guide contains details of our fees and charges. All these documents are available here on our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange are leveraged products and carry a high level of risk and you can lose more than your initial deposit so you should ensure CFD and Foreign Exchange trading meets your personal circumstances.

General Advice Warning: Being general advice, this newsletter does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

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